A recent emergency legislation of the Hungarian Government has made it possible for companies facing imminent insolvency to initiate reorganisation procedures until 31 December, 2022 in which they may agree with their creditors on rescheduling their debts even by excluding the public.
In the life of any business – especially in these times – there can come a time when marketing fails, market strategies do not work and despite all due care, the business is heading for insolvency. Until now, reorganisation could take place on the basis of an arrangement reached in a bankruptcy proceeding, typically by divesting and selling off the working, marketable part of the business and liquidating the non-working part. In this process, the survival of the company is in the hands of the creditors. The creditors either see a future in the troubled company or write off the losses and settle for the assets they are entitled to in the liquidation proceedings.
This basic principle has been changed by a new government decree promulgated with regard to the state of danger due to COVID-19. Under the new regulation, the supreme body of a company that meets certain basic criteria may decide to order reorganisation on the basis of a proposal from the director. The proposal must include, inter alia, the financial accounts or interim balance sheet not older than 3 months and a preliminary reorganisation plan, as well as the list of the creditors to be involved in the reorganisation.
The Metropolitan Court is exclusively competent to order the reorganisation and the company must be represented by a lawyer. The state-owned Nemzeti Reorganizációs Nonprofit Kft., as appointed expert, will participate in the procedure throughout, as the eligibility of the reorganisation is already a professional issue. If the appointed expert finds the petition to be well-founded on the basis of the director’s proposal, the court will impose a moratorium for 90 days, during which time the relevant debts of the business will not become due. It is important to note that wage and salary claims and public charges related to those as well as damage claims cannot be included in the reorganisation.
During the moratorium period, a contracting partner of a company with whom the company has a long-term civil law relationship under which the contracting partner supplies goods or services on a continuing basis for the operation of the company may not suspend performance of the contract, may not terminate the contract or in any way unilaterally modify it to the detriment of the company, only on the grounds that the undertaking is being reorganised. However, this is subject to the condition that the company’s managing director declares on oath in writing to the contracting partner that the company is able to pay the fees that become due during the reorganisation procedure. However, if the company is more than 30 days late in paying such fees, the contracting partner shall be exempted from the above restrictions.
During the moratorium, the company director may make legal declarations concerning the assets of the company or commitments going beyond the scope of day-to-day management only with the prior consent of the reorganisation expert, and in case of breaching this obligation, the court may impose a fine on them.
During the moratorium, the company must agree with all its creditors involved in the reorganisation. If it fails within the 90 days but there is a chance of a deal being reached, the court can extend the moratorium for further 60 days. The reorganisation plan approved by the creditors will also be reviewed by the reorganisation expert and the court will decide on the basis of this opinion. The court-approved reorganisation plan is an authentic instrument, so the creditors concerned can also apply for an enforcement order if the company fails to comply with the terms of the plan.
The biggest advantage of the reorganisation procedure, however, is that it is generally not public, so a company in difficulty may be able to recover without its competitors knowing about this ‘favourable’ market situation. Still a company may decide to have its creditors approve the reorganisation plan in a public reorganisation procedure. In this case, the company will be granted a moratorium of 170 days which will be published in the Official Gazette of Companies, as in bankruptcy proceedings. Within 30 days of this publication, any creditor can register for the procedure where 75% of the registered creditors’ votes can approve the reorganisation plan which will have a binding effect on all other creditors too. As part of the public reorganisation procedure, the assets of the company may be divested and sold.
It should also be mentioned that the reorganisation process has considerable costs. The fee for the reorganisation expert is set by law in grades, according to the book value of the assets. For a company with a balance sheet total of HUF 100 million, for example, the expert may charge a total fee of around HUF 2.5 million.
Although the legislation allows the procedure to be launched on a temporary basis until 31th of December 2022, it looks like companies will still be able to deal with their financial difficulties at an early stage, since in order to comply with EU law, Parliament adopted a law introducing the restructuring procedure into Hungarian law from the 1st of July 2022. This procedure will be very similar to the reorganisation procedure described above.